Facebook knew this could happen.
In a February SEC filing, which includes an obligatory meditation on every conceivable risk to future profits, Facebook warned that “unfavorable publicity regarding, for example, our privacy practices … [or] the actions of our developers whose products are integrated with our products” could imperil “the size, engagement, and loyalty of our user base.”
True to form, the $500 billion social networking behemoth’s stock plummeted after news broke Mar. 16 that the data analysis firm Cambridge Analytica, which was hired by President Trump’s campaign in the summer of 2016, acquired data from about 50 million Facebook users, often without their direct knowledge. The data was reportedly used to create psychological portraits of voters for strategic political purposes, though the firm’s efficacy remains unclear. Facebook has blamed the episode on a researcher who collected the information under the guise of academic research (downloading information on both the people who installed its app and their friends), then provided it to Cambridge Analytica.
“The entire company is outraged we were deceived,” read a statement from Facebook this week. “We are committed to vigorously enforcing our policies to protect people’s information and will take whatever steps are required to see that this happens.”
Facebook’s foremost concern is not that many people will deactivate their accounts for more than a week in protest, which remains unlikely despite widespread dyspepsia over the matter. Instead, it is that a significant number of users will check in less often or air fewer details about themselves out of caution. Facebook, which also owns Instagram and WhatsApp, lives or dies by how well it can tailor ads to a persistent, ever-growing audience of people who meet each marketer’s detailed target demographic. Sure, you might be the product, not the customer. But you still pay for Facebook, just not in dollars. You pay in data.
There is no guarantee that this business model can survive. Facebook’s image has already taken a beating for its role in the spread of malicious disinformation from Russia, not to mention helping more run-of-the-mill inaccuracies spread from friend to friend. Still, people will always want to know what their sophomore roommate is up to in Reno or whatever happened their high school sweetheart. Going forward, they just might have to pay for that news with actual money. Absent a more palatable alternative, they will.
The future belongs to the first overtly “privacy positive” social network that, for a reasonable subscription rate, will default to a total lockdown in what any third party, including the platform itself, can see or use. There would still be advertising to keep subscription rates down, just as newspapers and magazines, this one included, still display ads to their subscribers. Users would simply be paying for the privilege of opting in to what they wanted advertisers to know, if anything.
Targeted advertising isn’t going away any time soon. But it stands to reason that there are things we’re perfectly happy to tell a social network in order to get ads that actually appeal to us. While I do not want a marketer targeting my age, relationship status, travel schedule or political affiliation—which Facebook guessed correctly, according to the ad preferences page, even though I’m fairly sure I never filled in that field—I genuinely want them to know that I’m a Phillies fan who lives in Washington, D.C. so that I’m shown ads for products I might actually want. Both of those precious factoids are easily gleaned from my Twitter feed. Or now this article. (To be sure, a less omniscient ad platform would not have nearly the precision that Facebook offers, so it would likely bring in less revenue. Though it occurs to me that there’s some advantage to targeting only the people who actively want to be exposed to your content.)
So how much would this cost users? Facebook estimates that it pulled down $20.21 in revenue per active user worldwide last year, for a total of $40.65 billion. That sum amply covered the $20.45 billion the company paid in costs and expenses. After taxes, Facebook posted $15.92 billion in profits. That per-user revenue was considerably higher in the U.S. and Canada, where a more developed and monetized audience netted $84.41 per user. That’s still less than what you might pay for Netflix or HBO, though perhaps more than many of Facebook’s 2 billion monthly users would be willing to shell out.
But even if subscriptions were prorated by market, and even if a privacy-positive network were to grow to Facebook-sized proportions, it would take less than $84.41 a month in the U.S. and Canada to turn a healthy profit. The trouble with relying on a lot of ads is that you need to store a lot of content. These days, that includes lots of video, with its lucrative “pre-roll” and “mid-roll” ads. To keep up with demand, Facebook has aggressively tried to get users and companies to post their content directly on the social network. When you get into the business of hosting large amounts of original content, however, your bill for storing and indexing rises quickly. Facebook doesn’t disclose its exact obligation for running massive warehouses around the world, but it’s safe to assume it’s a fair portion of its $20 billion in expenses. Without the burden of being a major content platform or pouring money into sophisticated algorithms to serve ads based on rigorous analysis of a person’s profile, we can estimate that $75 a year would cover the operating costs and generate a healthy profit.
Facebook is a black box that rarely leaks compared to, say, the federal government. So we do not know whether it has any sort of plan if it reaches a point where there’s no longer a compromise on data sharing that appeases both users and advertisers. The best we can do is watch for the clearest possible sign of major turmoil in Menlo Park, Calif. We’ll know the end is near when Facebook lifts its prohibition on making a fake account for your dog.
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